Subject: URGENCY ORDINANCES AMENDING DEFERRED COMPENSATION PLAN AND THE
PTC § 457 PLAN TO IMPLEMENT EGTRRA CHANGES
COUNCIL DISTRICT: City-wide
It is recommended that the City Council adopt:
a. An urgency ordinance amending Chapter 3.48 of the San José Municipal Code, the City of San José Deferred Compensation Plan, to implement changes enacted by the Economic Growth Tax Relief and Reconciliation Act; and
b. An urgency ordinance amending Chapter 3.50 of the San José Municipal Code, to implement changes enacted by the Economic Growth Tax Relief and Reconciliation Act.
BACKGROUND
The City of San José maintains two eligible deferred compensation plans under the provisions of Internal Revenue Code Section 457. The City of San José Deferred Compensation Plan is a voluntary plan open to all City employees. The PTC 457 Plan is a mandatory plan in lieu of Social Security for employees such as part-time, temporary and contract employees who are not eligible to participate in either the Federated City Employees Retirement Plan or the Police and Fire Department Retirement Plan. Both plans are administered by the Deferred Compensation Advisory Committee (DCAC).
On June 7, 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). The bill contains significant changes to the Internal Revenue Code that affect eligible deferred compensation plans.
The DCAC established a subcommittee to consider
the changes made by EGTRRA and make recommendations regarding Plan amendments
to implement these changes. At its
October 25 meeting, the DCAC accepted the subcommittee’s recommendations and
directed the City Attorney’s Office to draft ordinances implementing the
changes.
The EGTRRA changes considered by the DCAC and the DCAC’s recommendations are listed in the attached “EGTRRA AMENDMENTS CHECK-LIST”. Except as noted in the Check-List (item 7 and second bullet in item 14), the effective date for all EGTRRA amendments is January 1, 2002. The subcommittee and the DCAC worked closely with the investment providers, ICMA Retirement Corporation and ING Aetna, in the development of these recommendations, and received valuable assistance from both of them.
Several of the new provisions are mandatory and must be implemented by January 1, 2002. These include the requirement that the plans permit rollovers from the plans to other eligible retirement plans (item 5) and certain provisions relating to domestic relations orders issued in marital dissolutions (item 13). Thus, the mandatory changes to the City’s plans must be in place on January 1, 2002.
The DCAC has determined that other, permissive changes such as the increase in the deferral limits, the Age 50+ Additional Deferral, and allowing participants to change the election for distribution of benefits would benefit the participants and make the City’s deferred compensation plans more competitive with deferred compensation plans offered in the private sector.
California is
one of twenty states that do not automatically adopt Federal tax
legislation. Our advisors tell us that
they expect the California legislature to approve adoption of EGTRRA
provisions. If this does not happen
before January 1, 2002, it is likely that they will make the provisions
retroactive to that date. If California
does not approve adoption of EGTRRA, our participants may not be able to take
full advantage of the higher contribution limits for state income tax
purposes. We are coordinating with the
Finance Department to be sure that our payroll system can accommodate differing
state and federal tax provisions, should that occur.
The proposed changes were presented to the Benefits Review Forum on October 24. Information has been provided to the employee organizations. The Check-List has been presented to both the Board of Administration for the Police and Fire Plan and the Board of Administration for the Federated System.
In addition, the DCAC held information meetings on November 6 and November 14, and has scheduled information meetings for November 29, December 5 and December 12.
An article on the changes is set for the November editions of CityLine, the POA Vanguard, and the Police Department’s Insider. The investment providers will be sending information letters to all Plan participants. It is expected these letters will be sent during the months of November and December.
This memo was
prepared in coordination with the City Attorney’s Office.
COST IMPLICATIONS
There are no cost implications to the City or the Plan participants for the implementation of the recommended changes.
DEFERRED COMPENSATION ADVISORY COMMITTEE
KAREN THOMPSON
Secretary to the Committee